Sean Brodrick takes a look at how the price of crude oil is surging against the small increase in pricing natural gas has seen in 2007. In this issue of Money and Markets, Mr. Brodrick examines the price ratio of crude oil and natural gas.
Jupiter, FL (PRWEB) February 15, 2008 -- Sean Brodrick takes a look at how the price of crude oil is surging against the small increase in pricing natural gas has seen in 2007. Mr. Brodrick examines the price ratio of crude oil and natural gas.
Natural gas climbed just 6% in 2007. Compare that to the 56% surge that oil has enjoyed. As a result, a barrel of crude costs about 12 times as much as 1 million BTUs of gas. That is way above the average price ratio of 7.8 over the past 10 years. That ratio can get even higher, in July 1991, in the wake of the Gulf War, oil traded at 18 times the price of natural gas. In the past decade, the U.S. has only seen three times when crude oil traded at a price more than 12 times that of natural gas. Each time, the gap narrowed to the average within four months.
America gets about 40% of its energy from oil, according to statistics from oil giant BP. Meanwhile, Natural gas accounts for 24% of U.S. energy supply, about as much as coal. But drillers aren't acting that way:
The number of drilled U.S. oil wells increased 28% in 2007, according to the Energy Department. Natural gas wells declined 1.1%.
And unlike the Strategic Petroleum Reserve, the U.S. has no strategic reserve for natural gas. When commercial inventories go down there's no government safety net. According to the Energy Information Administration, U.S. natural gas inventories fell 12% to 2.06 trillion cubic feet since February 2007. That is still above the long-term average, but according to Bloomberg news, stockpiles are at the lowest level for this time of year since 2004.
From a low in early 1999 of 397 active gas drilling rigs in Canada and the United States combined, the count has vaulted to 1,424 active gas rigs for the week just ended. The fact is, natural gas in North America is getting harder to find; and the gas that is found is smaller fields that flow at slower rates. As a result, North American natural gas production has been stuck on a plateau fluctuating between 26 and 27 trillion cubic feet of production annually since 1998.
Nationwide, consumption increased 2.8% to 1.81 trillion cubic feet in November. That probably ratcheted up in December, as arctic weather gripped the nation. And the below-normal cold we saw in January was in contrast to above-normal temperatures last year. Natural gas consumption increased by about 6% in 2007, according to the Energy Information Administration (EIA), and is expected to increase between 2% and 6% going forward.
That projection could be low, as more and more coal-fired plants are derailed by concerned citizens who don't want coal plants pumping tons of carbon dioxide and heavy metals into the atmosphere, utilities are turning to natural gas to generate electricity.
"Part of the reason that natural gas has been in such a slump is that this past hurricane season was a dud. While there were major storms, they never came near the U.S. coast or the gas-rich "Energy Alley" of the Gulf of Mexico," Mr. Brodrick states.